Newfound pain

There’s a long but interesting article in Canada’s The Star on how the decline in oil prices has hit the city of St. John’s in Newfoundland. It is interesting because although St. John’s does have an offshore oil industry, it is not a traditional coastal oil town in the manner of Aberdeen or Stavanger, and is often overshadowed insofar as the Canadian industry goes by Calgary.

Though Newfoundland is some 6,500 kilometres east of ground zero for Canada’s oil industry, the fallout from the swift and prolonged energy price dive has arguably hit the smaller, less-diversified province even harder than it has hit Alberta.

…

With few work prospects at home, especially after a moratorium on cod fishing in the 1990s put some 30,000 people out of work, Newfoundlanders looked west, where Alberta’s energy sector paid six-figure salaries to attract desperately needed workers.

Some 10,000 Newfoundlanders migrated to Alberta, poured hundreds of millions of dollars back home into their island communities. At the same time, Newfoundland’s own offshore industry took off, solidifying the island’s ties to the global oil price.

St. John’s has been hit with a double whammy: the town was not only dependent on its own oil industry, its fortunes were joined at the hip to those of Alberta.

The contents of a family’s life — an oven, a side table, old magazines — are unloaded from a truck into a yard overflowing with pickups, snowmobiles, motorcycles, boats and trailers at Fitzpatrick’s Auctioneers.

The lot has become a graveyard for toys that were easily afforded in past lives built on oil money, an elegy for Newfoundland’s crude-tied boom.

“It’s amazing. You’d never think what the price of oil could do,” lamented owner Blair Loveless after surveying the stockpiles.

…

“It’s sad. These people never thought the day would come where a barrel of oil would be below $30 (U.S.),” he said. “They were just living for the moment and they were making a huge amount of money and just thought it would continue on.”

The situation in St. John’s must be replicated from the aftermath of every boom in history, and not just the oil ones. I don’t know how many people I saw squandering the money on toys of exactly the type described in the above article, with too little being put aside for the inevitable day the crash would come. Some people are just rubbish with money, and would not save a cent if the boom lasted until politicians resigned in the belief their job was done. But others…jeez, we even had a warning shot across our bows in 2008 when the price momentarily dropped and companies tightened their belts and started laying off. The old hands told the younger ones to save as much as they could because the good times wouldn’t last forever, and thankfully a lot of them did: most bought property, which at least puts a roof over their heads while they’re unemployed. But a lot didn’t:

Albert Wakely moved his wife and three young children from Newfoundland to Alberta in 2012 with the promise of doubling his income as a truck driver. “The money was calling,” he said.

“We had everything,” he says of his family’s life in Innisfail, a town in central Alberta.

“I had two vehicles, a quad, a ski-do, a mini-quad for my youngest son. The only thing we never invested in was a new home because we had all the intentions of coming home.”

Snowmobiles and quad bikes are great, and there is no reason why oilmen should not enjoy their wealth in any way they please. But for Christ’s sake, you buy this shit after you’ve put away most of your earnings for a rainy day or bought a tangible asset! How many busts is it going to take before people stop listening to the Peak Oil bullshit and understand the boom times are a bonus, a stroke of luck, and not something to be relied upon?

Not that oil workers are alone in having not prepared for a downturn:

Just like the workers who bought new homes and toys with their newfound oil money, the provincial government saw the sudden influx of revenue as a chance to spend on sorely needed infrastructure and social programs. It did not set aside a rainy-day fund, as Alberta had.

“The reliance on oil — and I would argue to the expense of the development of other areas of economic potential — hasn’t set us up well for the situation we’re in now,” said Newfoundland’s newly elected finance minister Cathy Bennett.

She outlined the grim situation the government faces to a group of 100 St. John’s residents attending a pre-budget consultation in a high school gym last month.

Social programs. What to do?

Citizens were asked to brainstorm how to shore up government revenues and cut expenditures, and how the province can innovate to diversify the economy.

The government has also asked departments to shave 30 per cent of their costs over the next three years, which could result in job losses.

Presumably the finance minister is going to shave 30% off her own salary if she’s going around asking citizens – many of who appear to have been a little wayward with their own finances – how to dig themselves out of the hole they’re now in. Like the oil companies themselves, the local government has merely ballooned to fit the revenues flowing in: if the money was spent on infrastructure, it ought to still be there and costing little other than for maintenance. I suspect it went on increased salaries and buying votes, as it has in every other government in history that stumbled into extra cash. Yup: in defiance of John Maynard Keynes, these lot were running a deficit in the period 2012-2014 during the peak of the boom, and this article gives us an inkling what the cash was being spent on:

A new Progressive Conservative leader will be chosen at a convention July 5 in St. John’s. Under provincial law, an election must be called within 12 months after the new premier is sworn in.

Johnson downplayed questions about whether the budget lays the groundwork for a coming campaign. Opposition critics, for example, have long pushed the Tory government to make good on promised early learning and kindergarten programs.

The new budget commits $35.4 million to enhance such services and offer all-day kindergarten starting in September 2016.

Overall new spending is up a restrained 2.1 per cent from last year, Johnson said. It includes salary increases for government workers and $50.6 million over five years to convert provincial student loans into grants for those who qualify.

This almost makes buying snowmobiles and quad bikes sensible by comparison. I wonder how that all-day kindergarten is looking now? At least the kids will have plenty of cheap quads to play about on.

Even with the downturn biting hard, others still appear to be struggling with basic economics:

High-end executive rentals are sitting empty, or being rented for far less than they fetched when St. John’s was booming with oil-related business. “In the executive rental market, the inventory is triple what it was even two years ago,” said real estate agent and landlord Larry Hann.

He’s been trying to find a renter for a condo that rented for $4,800 a month in 2014, and is now priced at $3,500. It has been on the market for seven months.

I imagine there are thousands of landlords located in emptying oil towns scattered around the world who have taken full advantage of the oil boom to not learn the first damned thing about economics. If you have a condo reduced from $4,800 to $3,500 and it’s been empty for 7 months reduce the bloody price until you get a tenant, you fool!! I need to come up with a term for people who can only run a business during a boom period.

Home sales in St. John’s fell three per cent in December compared to a year earlier, while prices in the province fell 2.4 per cent to $267,093. Housing starts in 2015 were 20 per cent lower than the year before.

Either Canadian housing is seriously expensive or that average price is going to fall one hell of a lot more than 2.4%. I suspect this figure has been pulled out of an estate agent’s backside instead of being what people are actually paying. Is anyone still buying there? If it’s like anywhere else, everyone will be hunkered down trying not to think of the words “negative” and “equity” and the government will be screwing over anyone who was sensible enough to save their cash by keeping interest rates low enough that foreclosures don’t cause them political headaches.

The party in St. John’s sounds as though it was good, but the hangover is hurting badly. Unlike other oil towns, it probably wasn’t used to that kind of drinking.

“Dude, where’s my quad bike?”

6 Responses to Newfound pain

I grew up in the oil patch in West Texas (Permian Basin), and I have seen 3 booms/busts. The first started right after the Arab embargo in 1972 and busted in 1980’s, the second in the 90’s and now this one. Everyone there, except the governments, knows what comes around goes around, and a bust will ALWAYS follow a boom, and most prepare accordingly. The 90’s bust damn near killed the state government and I thought they would have learned, but no, the pain will hit Austin again, just not as hard as the previous bust, but they will have to cut spending somewhere.

The tough thing for Newfoundland is that the cod moritorium which put 10% of its total adult population out of work in the 90s devastated the economy. When oil started making money in the 2000’s, the province was so far behind that it was hard to save, the government were just playing catch up to try and provide a similar quality of life to the rest of Canada.

Not saying they shouldn’t have saved, but there was a lot of competing demands. Hopefully after this bust we’ll not be as far in the hole and can get to a reasonably balanced fiscal situation.

Nothing is ever black and white, but I sure wish they’d managed a bit better planning for the busts…..

Yes, the article does mention the cod moratorium, which I can imagine had a huge impact on a place probably dependent on fishing since its existence. It’s interesting that you say Newfoundland was playing catch-up, that does put a different perspective on it. I suppose the answer would be to spend the windfall on fixed assets and infrastructure which doesn’t need continued high revenues to pay for, but the temptation is always to buy votes with higher salaries and “free” stuff. The problem with increasing salaries is, as anyone who’s lived in an oil town could tell you, the prices just increase to match and a lot of the benefit is lost (usually to those who already own real estate).

Of course, what the Newfies should have done is declare their dialect a new language and threaten to become independent, and Ottawa would have been writing blank cheques in no time at all!